NBN sale ruled out — taxpayers to pay instead

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It seems the NBN will not be acquired by Telstra for now, but it remains a political football, which can be kicked in any direction by the Morrison Government, writes Paul Budde

The Minister for Communications, Cyber Safety and the Arts Paul Fletcher has made his first in-depth public comments on various aspects of the NBN.

The fact that the telecommunications industry breathed a sigh of relief when the new Communications Minister ruled out the sale of the NBN to Telstra, is an indication of how low trust in politics has sunk in this country.

It has been made very clear in the NBN legislation from 2009 that the NBN is a wholesale only investment and that it can’t operate a retail business at the same time. Even though this is set in concrete within the legislation, the industry over the last few years had become increasingly more anxious about a possible sale of the NBN to Telstra.

The 'National Broadband Network Companies Act 2011' states:

 (2)  The other objects of this Act, when read together with Part XIC of the Competition and Consumer Act 2010, are as follows:

(a)  to ensure that the supply of an eligible service by an NBN corporation is on a wholesale basis;

The legislation also indicates that the government eventually will sell off the NBN, but that the wholesale clause would still stand.

So, for the time being, it looks like the industry is safe on that issue. But we also know that legislation can be changed and the future of the NBN still remains shrouded in clouds. Furthermore, this privatisation process – whenever it happens – will most likely go over two government cycles, so it will be a highly politicised event.

Shortly before the Minister provided the privatisation clarification, the Australian National Audit Office (ANAO) had criticised the Department of Communications and the Arts about the uncertainties of the Government's $19.5 billion loan to NBN Co. The ANAO is worried about the company’s capacity to fully service the loan. It stated that a lack of information regarding the monitoring of this loan and the possible consequences of an NBN Co failure to service the loan would create a risk to the Commonwealth.

Of course, these worries need to be seen within the context of several reports questioning the financial viability of the NBN. Delivering an affordable high-speed broadband service and providing a six to seven per cent rate of return has been seen by many as incompatible.

Despite these worries, the Communications Minister is toeing the political line about the change in direction the Coalition took in 2013. He supports the fact that the Coalition abandoned a full-fibre solution for the fixed part of the NBN, replacing this with the so-called "Multi-Technology Mix" (MTM) infrastructure. The latter providing significantly lower service quality.

However, at this late stage of the project, I fully agree that there is no other way forward than first completing the MTM as best as we can.

Increasingly, this MTM will not be good enough to keep pace with the many new innovations that are taking place around the digital economy and the digital society. As an example of this, last week we mentioned the low network quality problems that make watching video-entertainment services a painful experience for many users.

What this indicates is that more investments are needed to upgrade the NBN for it to keep pace with new digital developments. At the same time, there is only so much that the average users are prepared to pay for their NBN service. This is around $50-$80 a month. NBN Co is already struggling to get its return based on the current investment of $51 billion. Imagine what will happen if it must spend another $30 billion or so for the upgrade, without any significant increase on that return.

No wonder that the ANAO is worried about NBN Co's financial situation.

The Government and NBN Co are looking at all sorts of ways of finding more money to prop up what looks like the shaky financial situation of the NBN. They have revived their old broadband tax proposal of $7.10 per month for users of NBN equivalent services (basically its competition). Labor has already more or less caved in, so it looks like that this tax will now be introduced before the end of the year.

The reality of all of this is that the NBN remains a political football, which can be kicked in any direction depending on the political wind of that moment. Of course, the Morrison Government can make legislative changes that could allow an earlier sale of the NBN. It can wave certain restrictions regarding the nature of the wholesale-only element of the NBN. It could split up the NBN and as such create technology monopolies or geographic monopolies. Equally, it could write off parts of the NBN, which of course would vindicate the ANAO's worries.

Because of all the problems and the political nature of the project, whatever solution is implemented, this then needs to be checked against the commercial reality. What, for example, happens if say after the case of splitting up the NBN in individual infrastructure (fibre, HFC, copper, mobile, satellite) fiefdoms, these fiefdoms cannot survive on their own? The commercial reality of such a situation could be mergers and acquisition between the fiefdoms. Consequently, the NBN could end up as just another (private) monopoly.

And while at this stage, Telstra would not be allowed to gobble up the NBN, it could use a structurally separated entity, InfraCo, to buy the company and then, again, at a later stage – under commercial pressure – it could be forced to combine the infrastructure with the retail business again.

It's true none of these outcomes that are set in concrete. However, with all the uncertainties and the political nature of the NBN, any of these scenarios could potentially evolve.

Before the last election, there was hope that a new government would announce a full and holistic review of the telecommunications industry.

This would include:

  • the future of the NBN (including the consequences of its privatisation);
  • strengthening of competition;
  • the role of mobile — and in particular 5G (fixed-mobile conversion);
  • guarantees for universal access (access affordability) to the digital society and economy, based on truly high-speed access services; and
  • national security and privacy issues.

It is also interesting to come back to the suggestion former Communications Minister and PM Malcolm Turnbull made to President Trump. He argued that the West should build up its own telecoms capabilities so as not to be dependent on China. And in the last few days, it has become clear that the USA is indeed looking at its options here. What this indicates is that we are not just talking about commercial market-driven developments but also government interventions.

It clearly is in our national interest to develop a holistic plan for the rapidly broadening telecoms industry that is shaping our economy, society and politics.

Paul Budde is managing director of Paul Budde Consulting, an independent telecommunications research and consultancy organisation. You can follow Paul on Twitter @PaulBudde.

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